As such, markets took it as a sign of an official bid to cap long-term borrowing costs – one that may eventually see the Fed step in and buy as many bonds as required to hold yields down, a form of yield-curve control.
Hard assets that benefit from financial repression and a deluge of fiat liquidity quickly rallied. Bitcoin and gold surged, with bitcoin rising from $64,000 to $80,000 in a week. Treasury’s program is not QE, meaning it does not add fresh liquidity to markets, and the size is small compared with the $40 trillion federal debt. So unless the Fed joins in, buying bonds itself and injecting liquidity, a sustained decline in yields looks unlikely.
“The market senses a slippery slope towards fiscal dominance and a possible loss in Fed independence. The assumption here is that for the Treasury to be successful in keeping yields down, it will need to significantly increase the size of the buybacks. That might require the Fed to become complicit in this operation twist, which takes us down the debasement path,” Jurrien Timmer, Fidelity’s director of global macro, said.
That assumption is what Warsh’s speech will test.
If Friday’s speech undercuts that assumption, the bullish momentum in bitcoin and gold could weaken. Language that casts the buybacks as routine liquidity work, stresses monetary policy independence, and rules out Fed participation would could push Treasury yields and the dollar higher and bitcoin and gold lower.
